EN BANC

[G.R. No. 41643. July 31, 1935.]

B. H. BERKENKOTTER, Plaintiff-Appellant, v. CU UNJIENG E HIJOS, YEK TONG LIN FIRE
AND MARINE INSURANCE COMPANY, MABALACAT SUGAR COMPANY and THE
PROVINCIAL SHERIFF OF PAMPANGA, Defendants-Appellees.
Briones & Martinez for Appellant.
Araneta, Zaragoza & Araneta for appellees Cu Unjieng e Hijos.
No appearance for the other appellees.
SYLLABUS
1. MORTGAGE; IMPROVEMENT ON THE MORTGAGED PROPERTY, INCLUDED IN THE MORTGAGE.
The installation of a machinery and equipment in a mortgaged sugar central, in lieu of another of
less capacity, for the purpose of carrying out the industrial functions of the latter and increasing
production, constitutes a permanent improvement on said sugar central and subjects said
machinery and equipment to the mortgage constituted thereon. (Article 1877, Civil Code.)
2. ID.; ID.; PERMANENT CHARACTER OF THE IMPROVEMENT. The fact that the purchaser of the
new machinery and equipment has bound himself to the person supplying him the purchase
money to hold them as security for the payment of the latters credit, and to refrain from
mortgaging or otherwise encumbering them does not alter the permanent character of the
incorporation of said machinery and equipment with the central.
3. ID.; ID.; OWNERSHIP OF THE IMPROVEMENT. The sale of the machinery and equipment in
question by the purchaser who was supplied the money, after the incorporation thereof with the
mortgaged sugar central, does not vest the creditor with ownership of said machinery and
equipment but simply with the right of redemption.

DECISION

VILLA-REAL, J.:

This is an appeal taken by the plaintiff, B. H. Berkenkotter, from the judgment of the Court of First
Instance of Manila, dismissing said plaintiffs complaint against Cu Unjieng e Hijos Et. Al., with
costs.
In support of his appeal, the appellant assigns six alleged errors as committed by the trial court in
its decision in question, which will be discussed in the course of this decision.
The first question to be decided in this appeal, which is raised in the first assignment of alleged
error, is whether or not the lower court erred in declaring that the additional machinery and
equipment as improvement incorporated with the central are subject to the mortgage deed
executed in favor of the defendants Cu Unjieng e Hijos.

It is admitted by the parties that on April 26, 1926, the Mabalacat Sugar Co., Inc., owner of the
sugar central situated in Mabalacat, Pampanga, obtained from the defendants, Cu Unjieng e Hijos,
a loan secured by a first mortgage constituted on two parcels of land "with all its buildings,
improvements, sugar-cane mill, steel railway, telephone line, apparatus, utensils and whatever
forms part or is a necessary complement of said sugar-cane mill, steel railway, telephone line, now
existing or that may in the future exist in said lots."
cralaw virtua1aw library

On October 5, 1926, shortly after said mortgage had been constituted, the Mabalacat Sugar Co.,
Inc., decided to increase the capacity of its sugar central by buying additional machinery and
equipment, so that instead of milling 150 tons daily, it could produce 250. The estimated cost of
said additional machinery and equipment, so that instead of milling 150 tons daily, it could produce
250. The estimated cost of said additional machinery and equipment was approximately P100,000.
In order to carry out this plan, B. A. Green, president of said corporation, proposed to the plaintiff,
B. H. Berkenkotter, to advance the necessary amount for the purchase of said machinery and
equipment, promising to reimburse him as soon as he could obtain an additional loan from the
mortgagees, the herein defendants Cu Unjieng e Hijos. Having agreed to said proposition made in
a letter dated October 5, 1926 (Exhibit E), B. H. Berkenkotter, on October 9th of the same year,
delivered the sum of P1,710 to B. A. Green, president of the Mabalacat Sugar Co., Inc., the total
amount supplied by him to said B. A. Green having been P25,750. Furthermore, B. H.
Berkenkotter had a credit of P22,000 against said corporation for unpaid salary. With the loan of
P25,750 and said credit of P22,000, the Mabalacat Sugar Co., Inc., purchased the additional
machinery and equipment now in litigation.
On June 10, 1927, B. A. Green, president of the Mabalacat Sugar Co., Inc., applied to Cu Unjieng e
Hijos for an additional loan of P75,000 offering as security the additional machinery and equipment
acquired by said B. A. Green and installed in the sugar central after the execution of the original
mortgage deed, on April 27, 1927, together with whatever additional equipment acquired with said
loan. B. A. Green failed to obtain said loan.
Article 1877 of the Civil Code provides as follows.
"ART. 1877. A mortgage includes all natural accessions, improvements, growing fruits, and rents
not collected when the obligation falls due, and the amount of any indemnities paid or due the
owner by the insurers of the mortgaged property or by virtue of the exercise of the power of
eminent domain, with the declarations, amplifications, and limitations established by law, whether
the state continues in the possession of the person who mortgaged it or whether it passes into the
hands of a third person."
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In the case of Bischoff v. Pomar and Compaia General de Tabacos (12 Phil., 690), cited with
approval in the case of Cea v. Villanueva (18 Phil., 538), this court laid down the following
doctrine:
jgc:chanroble s.com.ph

"1. REALTY; MORTGAGE OF REAL ESTATE INCLUDES IMPROVEMENTS AND FIXTURES. It is a

rule, established by the Civil Code and also by the Mortgage Law, with which the decisions of the
courts of the United States are in accord, that in a mortgage of real estate, the improvements on
the same are included; therefore, all objects permanently attached to a mortgaged building or
land, although they may have been placed there after the mortgage was constituted, are also
included. (Arts. 110 and 111 of the Mortgage Law, and 1877 of the Civil Code; decision of U.S.
Supreme Court in the matter of Royal Insurance Co. v. R. Miller, liquidator, and Amadeo [26 Sup.
Ct. Rep., 46; 199 U.S., 353].)
"2. ID.; ID.; INCLUSION OR EXCLUSION OF MACHINERY, ETC. In order that it may be
understood that the machinery and other objects placed upon and used in connection with a
mortgaged estate are excluded from the mortgage, when it was stated in the mortgage that the
improvements, buildings, and machinery that existed thereon were also comprehended, it is
indispensable that the exclusion thereof be stipulated between the contracting parties."
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The appellant contends that the installation of the machinery and equipment claimed by him in the
sugar central of the Mabalacat Sugar Company, Inc., was not permanent in character inasmuch as
B. A. Green, in proposing to him to advance the money for the purchase thereof, made it appear in
the letter, Exhibit E, that in case B. A. Green should fail to obtain an additional loan from the
defendants Cu Unjieng e Hijos, said machinery and equipment would become security therefor,

said B. A. Green binding himself not to mortgage nor encumber them to anybody until said plaintiff
be fully reimbursed for the corporations indebtedness to him.
Upon acquiring the machinery and equipment in question with money obtained as loan from the
plaintiff-appellant by B. A. Green, as president of the Mabalacat Sugar Co., Inc., the latter became
owner of said machinery and equipment, otherwise B. A. Green, as such president, could not have
offered them to the plaintiff as security for the payment of his credit.
Article 334, paragraph 5, of the Civil Code gives the character of real property to "machinery,
liquid containers, instruments or implements intended by the owner of any building or land for use
in connection with any industry or trade being carried on therein and which are expressly adapted
to meet the requirements of such trade or industry."
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If the installation of the machinery and equipment in question in the central of the Mabalacat
Sugar Co., Inc., in lieu of the other of less capacity existing therein, for its sugar industry,
converted them into real property by reason of their purpose, it cannot be said that their
incorporation therewith was not permanent in character because, as essential and principal
elements of a sugar central, without them the sugar central would be unable to function or carry
on the industrial purpose for which it was established. Inasmuch as the central is permanent in
character, the necessary machinery and equipment installed for carrying on the sugar industry for
which it has been established must necessary be permanent.
Furthermore, the fact that B. A. Green bound himself to the plaintiff B. H. Berkenkotter to hold
said machinery and equipment as security for the payment of the latters credit and to refrain from
mortgaging or otherwise encumbering them until Berkenkotter has been fully reimbursed therefor,
is not incompatible with the permanent character of the incorporation of said machinery and
equipment with the sugar central of the Mabalacat Sugar Co., Inc., as nothing could prevent B. A.
Green from giving them as security at least under a second mortgage.
As to the alleged sale of said machinery and equipment to the plaintiff and appellant after they
had been permanently incorporated with the sugar central of the Mabalacat Sugar Co., Inc., and
while the mortgage constituted on said sugar central to Cu Unjieng e Hijos remained in force, only
the right of redemption of the vendor Mabalacat Sugar Co., Inc., in he sugar central with which
said machinery and equipment had been incorporated, was transferred thereby, subject to the
right of the defendants Cu Unjieng e Hijos under the first mortgage.
For the foregoing considerations, we are of the opinion and so hold: (1) That the installation of a
machinery and equipment in a mortgaged sugar central, in lieu of another of less capacity, for the
purpose of carrying out the industrial functions of the latter and increasing production, constitutes
a permanent improvement on said sugar central and subjects said machinery and equipment to
the mortgage constituted thereon (article 1877, Civil Code); (2) that the fact that the purchaser of
the new machinery and equipment has bound himself to the person supplying him the purchase
money to hold them as security for the payment of the latters credit, and to refrain from
mortgaging or otherwise encumbering them does not alter the permanent character of the
incorporation of said machinery and equipment with the central; and (3) that the sale of the
machinery and equipment in question by the purchaser who was supplied the money, after the
incorporation thereof with the mortgaged sugar central, does not vest the creditor with ownership
of said machinery and equipment but simply with the right of redemption.
Wherefore, finding no error in the appealed judgment, it is affirmed in all its parts, with costs to
the appellant. So ordered.
Malcolm, Imperial, Butte and Goddard, JJ., concur.